Connecting Financial Management to Great Nonprofit Strategy

An abundance of your nonprofit’s day-to-day activities are directly impacted by your financial management plan.

Good financial management stems from several healthy practices. Some of these practices include the healthy acquisition of funds through fundraising, effective allocation of funds according to good organization skills, and economically-minded spending of such funds for your mission.

Therefore, when you plan out an effective management strategy for your nonprofit’s finances, it’s important to first, implement a strong strategy, and second, remember how that strategy will fit  into the big picture.

Throughout this post, we’ll dive a little deeper into each of these ideas.

Implementing a Strong Financial Strategy.

1. Clean up your nonprofit finances.
2. Create a foolproof fundraising strategy.
3. Research and plan your budget.

How Will Your Financial Strategy Fit Into the Big Picture?

1. Consider the overhead controversy.
2. Stay accountable to donors.
3. Remember financial health is the foundation of your mission.

When everything is connected to finance, it’s easy to get swept away by it. Throughout this article, and throughout your nonprofit’s day-to-day, remember that your finances are a tool through which you can achieve your mission.

We recommend writing down your mission and placing it somewhere that your nonprofit team members will see every day. Remember, your mission is worth fighting for! The first step in that fight is effective management.

Implementing a Strong Financial Strategy.

1. Clean up your nonprofit’s finances.

To move forward with an effective financial plan, your nonprofit will need to start in a place of financial security. A healthy financial standing begins by tracking all your financial information in a single location. This location needs to incorporate all the different funds and budgets your nonprofit has.

Nonprofit finances are handled differently than those of any other type of business or organization. Between the various budgeting needs, reliance on donations as your primary source of income, and various restrictions placed on these donations and grants, storing your accounting information in a generic financial software is likely ineffective.

Accounting software solutions designed specifically for nonprofits help organizations:

• Create an effective annual budget
• Track various funds on your nonprofit’s general ledger
• Pay employees and track timesheets
• Generate FASB- and GASB-compliant reports

With extensive budgeting and tracking functionality built into a fund accounting solution, your nonprofit will be able to best maintain a healthy financial standing.

When you start budgeting with healthy finances, you can feel confident in your ability to maintain that financial stability.

If your nonprofit needs to upgrade your accounting software to best suit your needs, check out the Community Brands nonprofit accounting software guide.

2. Create a foolproof fundraising strategy.

For your organization to consider your fundraising strategy “foolproof,” you’ll need to focus heavily on the concepts of retention and relationship building.

According to the 80-20 rule, 80 percent of your nonprofit fundraising revenue will come from the top 20 percent of your donor base. This means the majority of your nonprofit’s fundraising revenue will come from major and upper mid-tier gifts.

But, how do donors become a part of this upper tier? Through building relationships with them.

Donor stewardship is one of the most important aspects of your fundraising strategy because it’s the core of your retention rate. Some of the favorite ways for nonprofits like yours to show your donors they matter include:

• Creating a newsletter. Tell your donors how much they matter with stories and examples of how they’ve helped your nonprofit. Narratives show them the difference they make towards achieving your mission.
• Writing a personal note. Personal notes are especially effective during holiday seasons. Try hand-writing notes to your dedicated donors to celebrate the holiday and thank them for their contributions.
• Hosting an event. Events are the perfect opportunity for stewardship because your supporters get to meet your staff face-to-face, particularly your major gifts officer. This creates a more personal relationship than simply receiving a letter or email from the contact at your nonprofit.  

While stewardship will help improve your nonprofit’s retention rates, don’t completely forget about acquisition. There’s a natural and healthy percentage of donors who will be considered “lapsed supporters” for your nonprofit, whether it’s because they’ve moved away, changed financial statuses, or passed away.

Your nonprofit should plan for this healthy donor turnover, but keep in mind acquisition tends to be more expensive than retention.

3. Research and plan your nonprofit’s budget.

As we said earlier, the nonprofit financial world is very different from the for-profit world. In the nonprofit world, you’ll need to take into consideration the various restrictions donors, grantors, sponsors, and contributors place on donations.

This adds another element to your nonprofit financial management and budgeting process. You’ll need a way to define the restrictions on funds and allocate those funds as promised.

We recommend looking into fund accounting software that will allow your nonprofit to better distribute funds to fulfill the most pressing needs, according to necessary restrictions. Then, create:

• Your annual budget. Your annual budget should outline and allocate your annual funds to the various programs, projects, and other needs of your organization. This is also where you’ll include your budget for nonprofit overhead costs.
• A volunteer program budget. While volunteers may work without compensation, the program to recruit, retain, and thank your volunteers will require funding. Remember that these may be eased if you also ask eligible volunteers to apply for volunteer grant matches from their employers (learn more about volunteer grants from 360MatchPro).
• Event budgets. While your nonprofit’s events are a great opportunity for fundraising and stewardship, they’re also costly. Between the venue, software, activities, and registration tools, planning may send your head spinning! A well-researched budget will keep you in line and financially stable.
• Programming budgets. Of course, your nonprofit has projects and programs associated with your mission. For every new project your nonprofit plans, come up with an effective budget to keep it efficient and effective.  

When developing your budgets, be sure to use research to back up your estimates for each line item. More accurate research results in a more accurate budget, which results in better planning.

This research should originate from past budgeted and actual expense records, price quotes provided by vendors, and online resources and reviews. Be sure to also keep a very detailed record of your expenses so that your future budgets can be built off of this accurate information.

How Will Your Financial Strategy Fit Into the Bigger Picture?

4. Consider the overhead controversy.

The overhead controversy is the highly contested idea that nonprofits that spend too much on overhead are misusing their finances. Donors want to know their contributions impact the mission.

Ideally, the overhead controversy wouldn’t be a controversy at all. Staff compensation and internal operational costs are vital to the health of an organization and, therefore, the mission itself.

Think about it: A nonprofit spends money to train an employee to better raise funds in the community. This boost in fundraising is a direct effect of the training itself, but it brings in more money for the mission. Plus, adequate compensation keeps that employee around longer, so that the nonprofit doesn’t need to spend more on additional training costs.

We know that many expenses that might be considered “overhead” are actually mission-critical. However, given that a negative community perception of “overhead” can concern donors, it’s an idea that nonprofits must keep in mind when planning for financial success.

The two best practices to address this overhead controversy are:

• Prioritize efficiency. When your nonprofit maximizes efficiency, you’re getting the most output possible for the lowest input possible. Essentially, you’ll try to raise more money with fewer funds and resources.
• Improve transparency. New financial guidelines require nonprofits to provide more detail about their expenses and their revenue on financial documents. But nonprofits should strive to do so anyway. The more detail they provide, the better donors will understand the decisions your nonprofit makes.

Until the culture around nonprofit overhead expenses changes, these two steps will help your nonprofit make the most of the overhead controversy.

If you’re worried about how your overhead costs look to the community, try hiring a fundraising consultant to interview major stakeholders. A consultant will help you receive unbiased results and you’ll get a better idea of where your organization stands in the eyes of donors.

5. Financial management will help you stay accountable to donors.

Accountability to your donors helps establish a trusting relationship with your nonprofit. When your organization has effective records, it can also provide effective records to donors.

We mentioned in the last section that improving transparency with donors will help your nonprofit better deal with the overhead controversy. But there’s more to it. Federal regulations require that nonprofits remain accountable to their donors. Plus, it’s just the right thing to do!

This is the perfect opportunity to make full use of your nonprofit’s annual report.

Your nonprofit’s annual report is designed to provide an annual update to your donors and supporters about the financial activity of your organization as well as your recent activities. This can be an incredibly helpful document that can help you communicate your nonprofit’s:

• Fundraising successes
• Recent projects
• Ongoing campaigns
• Top donors and supporters

However, in order to best communicate this information, your nonprofit needs a lot of internal organization in terms of finances. Enter effective financial management.

When your nonprofit is organized internally, you can spend more time creating an effective, attractive, and digestible annual report because your financial information is readily available.

Look for methods of organization and reports that your nonprofit can pull that are already FASB compliant to ensure you have the required information readily available. This will save you time and energy when it comes to creating your report.

For more information about what to include in this important document, check out the guide linked here.

6. Financial health is the foundation of your nonprofit’s mission.

When operating correctly (on an effective budget), finances are cyclical. The way healthy and effective finances should work is: when you put more money into something, you should produce more value.

Therefore, your finances should look like this:

1. First, your nonprofit invests in your fundraising strategy. This means purchasing fundraising software, preferably one that integrates with your fund accounting solution; hiring a fundraising consultant to finalize your strategy, and marketing giving opportunities to supporters.
2. Next, your nonprofit will implement the fundraising strategy with these enhanced fundraising techniques. When you’ve invested in such strategy-enhancing techniques, your nonprofit should see an increase in the amount you’ve raised. If not, you may need to re-evaluate.
3. Third, organize and allocate funds based on donor preferences, your nonprofit’s needs, and your nonprofit’s budget. Be sure you know the approximate costs of each of your projects that you will be pursuing.
4. Finally, implement the projects and market the results. This marketing strategy should help bring in new supporters. With more supporters, your nonprofit will return to the first step and revise the fundraising strategy as necessary to complete more the next time around.

If you’re not in good financial health, you can’t improve your strategy, which leads to less effective fundraising, which results in incomplete projects and fewer supporters.

Therefore, when you contemplate this cycle, fundraising and financial security really is the center of your activities. It’s what makes completing your mission successful.

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Great financial management is the backbone to effectively building your nonprofit’s strategy. To help your nonprofit advance in its mission, be sure to first address its financial health and organization. With the right tools and information, you’ll be ready to take on the nonprofit world of fund accounting!

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Guest author

Pia Simeoni is Director of Marketing for Nonprofit Solutions at Community Brands. You can find Pia on LinkedIn and Twitter.